Clean Energy Fuels Corp. (CLNE): Natural Gas Highway Driving Future Success

The number of natural gas vehicles (NGVs) in the North American region is expected to increase at a compounded annual growth rate of 17% through 2020. Buses will lead this growth followed by medium and heavy duty trucks, which are expected to grow at 22% and 19%, respectively. These numbers look promising for natural gas suppliers, and Clean Energy Fuels Corp. is in a good position to benefit from this opportunity. Apart from directly selling natural gas in compressed and liquefied forms, the company builds and sells natural gas filling stations to its customers. Last month, Clean Energy reported that its customers ordered 70% more natural gas vehicles in the first nine months of 2013, than in the same period in 2012. This will drive Clean Energy’s revenue growth in the coming quarters.

In the longer term, Clean Energy will benefit more as natural gas gains wider acceptance as an alternative fuel. This is bound to happen, as natural gas is a better option compared to gasoline and diesel. On average, natural gas is cheaper by almost $1.50 per gallon compared to gasoline and diesel, and the use of natural gas reduces emissions by almost 30%. Even though an NGV costs up to 20%-30% more than a comparable gasoline vehicle, the fuel benefits help recover the higher cost over the course of 2.5 years to six years, depending on the type of vehicle. As more people opt for NGVs, the selling price of NGVs should decrease as companies improve production efficiency.

For medium and heavy duty trucks, the higher cost of NGVs is not stopping transport companies from converting their fleet to natural gas. Clean Energy signed a multi-year agreement with United Parcel Service (UPS), wherein Clean Energy will supply liquefied natural gas (LNG) to UPS’s private stations in Houston and Mesquite. The regular supply to these two stations will ensure better revenue for Clean Energy in the upcoming quarters and beyond. In a separate agreement, the company will assist UPS’s natural gas fleet by opening three stations in Texas. These stations in Amarillo, Mesquite, and San Antonio are part of Clean Energy’s America’s Natural Gas Highway (ANGH) network.

Under the ANGH network, Clean Energy is developing LNG fuelling stations on the interstate highway system that will provide natural gas to trucks traveling across the U.S. The company plans to open 150 LNG fueling stations in the first phase, out of which 70 were completed as of September 30, 2013. The company will probably provide an update on the construction of its ANGH network when it announces its fourth quarter results. Recently, Clean Energy opened its first LNG station in Florida, and companies like UPS and Raven Transport, among others, will use it. As more and more fueling stations on the ANGH network become operational, Clean Energy will post better sales in the coming years.

What about the financials?

Although the development of filling stations on the interstate highway has further improved Clean Energy’s growth prospects, it has taken a toll on the company’s financial statements. Over the five-year period from 2008-2012, the company failed to generate annual profits and positive free cash flows. As a result, the company was forced to raise additional finances to continue its expansion plan. Last year, Clean Energy completed a convertible debt offering of $250 million, and the company will pay 5.25% interest in semi-annual payments beginning April 1, 2014. The increase in interest expenses will further impact the company’s profitability.

However, the company can offset its increased interest expenses by utilizing the funds efficiently. In order to see whether the company incurred capital expenditures (capex) efficiently, investors should compare the company’s past capex to sales ratio.

Historically, the company successfully translated its increasing capital expenditures into increasing sales. The company’s capex increased consistently from 2010-2012, showcasing higher investments made for its future. These investments paid off in the first nine months of 2013, as the company generated better revenue compared to its capex, helping reduce its capex-to-sales ratio. In 2014, the company will incur capex on the development of the remaining fueling stations on its ANGH network. Assuming the company displays similar efficiency with respect to generating revenue through its capex, we can expect Clean Energy to post increased revenue in the coming years.

Conclusion

The benefits that natural gas offers as an alternative fuel to gasoline and diesel will definitely lead to increasing demand for NGVs in the coming years. Clean Energy’s ANGH network will help it capitalize on the increase of NGVs. Even though the company’s financials have suffered from the funding of its projects, the company’s financial position continues to improve as more filling stations become operational.

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